ORIX Corporation — FY2018 Form 20-F
Period and context: Annual report for the fiscal year ended March 31, 2018, prepared under U.S. GAAP and audited by KPMG AZSA LLC, which issued an unqualified opinion. The requested “2017 Q4” does not match the filing period; the filing reports full-year results, not standalone quarterly results. Amounts below are in yen unless stated otherwise; financial statement figures are in millions.
Financial performance
| Metric | FY2018 | Prior year | Change |
|---|---|---|---|
| Total revenues | ¥2,862,771 | ¥2,678,659 | +7% |
| Operating income | ¥336,195 | ¥329,224 | +2% |
| Income before income taxes | ¥435,501 | ¥424,965 | +2% |
| Net income attributable to ORIX shareholders | ¥313,135 | ¥273,239 | +15% |
| Basic EPS | ¥244.40 | ¥208.88 | +17% |
| ROE / ROA | 12.1% / 2.76% | 11.3% / 2.46% | Improved |
Operating margin was approximately 11.7% of revenue. Revenue growth was led by sales of goods and real estate, life insurance premiums and related investment income, and services income. Operating lease revenue declined 5%, partly reflecting lower gains on sales of automobiles and rental property. The increase in shareholder net income substantially exceeded pre-tax income growth, supported by lower income tax expense.
Cash flow, balance sheet, debt and liquidity
- Cash flow: Operating cash flow was ¥546,624 (down from ¥583,955); investing cash flow was negative ¥411,578 (outflow increased from ¥237,608); financing cash flow was positive ¥143,582, versus an outflow of ¥33,459. Cash and cash equivalents increased ¥281,371 to ¥1,321,241.
- Assets and equity: Total assets were ¥11,425,982, up 2%; ORIX shareholder equity was ¥2,682,424, up 7%. The shareholder equity ratio rose to 23.5% from 22.3%.
- Funding: Short- and long-term debt totaled ¥4,133,258; customer deposits were ¥1,757,462. Debt-to-equity, excluding deposits, improved to 1.5x from 1.7x. Long-term debt represented 93% of debt excluding deposits.
- Liquidity: Cash and cash equivalents plus unused committed credit facilities totaled ¥1,653,911. Unused committed facilities were ¥332,670, down from ¥393,968. Management described efforts to diversify funding, extend maturities and stagger repayments. Ratings reported were S&P A-, Fitch A-, Moody’s A3 and R&I A+.
- Credit quality: The allowance for doubtful lease receivables and probable loan losses fell to ¥54,672 from ¥59,227. However, 90-days-past-due direct financing leases increased to ¥12,084 (1.01% of that portfolio), and similarly past-due loans not individually evaluated increased to ¥12,748 (0.46% of the relevant loan balance). Total impaired loans declined to ¥47,142 from ¥59,025.
Material changes and segment results
Management said FY2018 was the fourth consecutive year of record net income and the ninth consecutive year of net income growth. Results met or exceeded the prior medium-term targets of ¥300 billion shareholder net income and ROE of approximately 11%–12%.
| Segment | FY2018 profit | Year-over-year change | Reported drivers |
|---|---|---|---|
| Corporate Financial Services | ¥49,275 | +30% | Higher securities-sale gains and services income |
| Maintenance Leasing | ¥40,162 | +1% | Higher average assets and services income |
| Real Estate | ¥62,372 | -14% | Lower rental-property sale gains; facilities-services income increased |
| Investment and Operation | ¥96,120 | +13% | Growth in principal-investment sales, environment and energy services, and affiliate income |
| Retail | ¥74,527 | +2% | Higher life insurance premiums and related investment income |
| Overseas Business | ¥106,602 | -5% | Lower affiliate income and disposal gains, partly offset by asset-management and aircraft revenues |
Consolidated income before taxes included ¥50,103 of equity income from affiliates and ¥49,203 of net gains on sales of subsidiaries and affiliates and liquidation losses. Both are significant sources of non-operating or transaction-related earnings; the latter declined from ¥63,419. The company recorded ¥5,525 of long-lived-asset write-downs, including ¥2,138 related to four hotels.
Outlook, risks and contingencies
- Outlook: For FY2019–FY2021, management targeted annual growth of 4%–8% in shareholder net income and ROE above 11%, emphasizing quality asset growth, asset and capital efficiency, fee-based businesses, and expansion in operating and investment businesses. FY2019 planned capital expenditures were approximately ¥563 billion, mainly operating-lease assets/property (¥480 billion) and power generation equipment (¥83 billion).
- Dividends: FY2018 dividend was ¥66 per share, with a 27% payout ratio. For FY2019, the company expected to maintain a 27% payout ratio and forecast an interim dividend of ¥30 per share; the year-end dividend was to be determined.
- Unusual item: U.S. tax reform enacted in December 2017 reduced the company’s income-tax provision. The filing attributes ¥17,465 of FY2018 tax-expense reduction to the U.S. tax-rate change; total provision fell to ¥113,912 from ¥144,039.
- Risk factors: Exposure includes credit losses; asset-value and lease residual-value volatility; interest-rate, currency and securities-price changes; funding access and refinancing costs; competition; acquisitions and investments; regulation and litigation; cyber and operational failures; and geopolitical or economic disruption. ORIX cautioned that hedging may be incomplete and allowances may not cover future credit losses.
- Commitments and legal matters: Commercial commitments totaled ¥1,041,831, including guarantees of ¥644,720; contractual cash obligations totaled ¥5,962,227, excluding short-term debt, trade payables and policy liabilities. A U.S. subsidiary’s Fannie Mae loan-performance guarantees accounted for ¥166,906 of guarantees; no repurchase claims were reported in FY2018. Management said ordinary-course lawsuits were not expected to have a material adverse effect, while noting an adverse decision could still be material.
- Accounting changes: The company expected no material overall impact from adopting the new revenue standard on April 1, 2018, though timing and disclosures for some asset-management performance fees and real-estate project revenue would change. It estimated the new equity-investment standard would shift ¥2,899 from accumulated other comprehensive income to retained earnings at adoption.
Investor verification priorities
- Separate recurring earnings from U.S. tax-reform benefits, affiliate gains and gains on asset or subsidiary sales; verify their sustainability.
- Review FY2018 segment performance, particularly the declines in Real Estate and Overseas Business, and determine whether the growth targets rely on asset expansion or transaction gains.
- Assess worsening 90-day delinquency measures against lower impaired-loan balances and a smaller total allowance; examine portfolio mix, collateral and reserve assumptions.
- Reconcile liquidity resources and near-term maturities with deposit funding, unused facilities and the ¥1.04 trillion of commercial commitments.
- Monitor the effect of planned ¥563 billion FY2019 capital expenditures on leverage, cash flow and returns, and confirm progress toward the 4%–8% earnings-growth and greater-than-11% ROE targets.
- Assess valuation uncertainty in Level 3 assets: recurring Level 3 financial assets were ¥176,095, approximately 2% of total assets, with material reliance on unobservable assumptions for some securities and insurance exposures.